Question

Your firm has been hired to develop new software for the? university's class registration system. Under the? contract, you will receive

$505,000

as an upfront payment. You expect the development costs to be

$433,000

per year for the next

33

years. Once the new system is in? place, you will receive a final payment of

$834,000

from the university

44

years from now.

a. What are the IRRs of this? opportunity???? (Hint: Build an Excel model which tests the NPV at? 1% intervals from? 1% to? 40%. Then zero in on the rates at which the NPV changes? signs.)

b. If your cost of capital is

10 %

is the opportunity? attractive?

Suppose you are able to renegotiate the terms of the contract so that your final payment in year

44

will be

$ 1.2

million.??

c. What is the IRR of the opportunity? now?

d. Is it attractive at the new? terms?

Answer 1

Years	Inflow	Outflow	PV Inflow @1%	PV Outlow @1%	PV Inflow @2%	PV Outlow @2%	PV Inflow @3%	PV Outlow @3%	PV Inflow @4%	PV Outlow @4%	PV Inflow @5%	PV Outlow @5%	PV Inflow @6%	PV Outlow @6%	PV Inflow @7%	PV Outlow @7%	PV Inflow @8%	PV Outlow @8%	PV Inflow @9%	PV Outlow @9%	PV Inflow @10%	PV Outlow @10%	PV Inflow @11%	PV Outlow @11%	PV Inflow @12%	PV Outlow @12%	PV Inflow @13%	PV Outlow @13%	PV Inflow @14%	PV Outlow @14%	PV Inflow @15%	PV Outlow @15%	PV Inflow @16%	PV Outlow @16%	PV Inflow @17%	PV Outlow @17%	PV Inflow @18%	PV Outlow @18%	PV Inflow @19%	PV Outlow @19%	PV Inflow @20%	PV Outlow @20%	PV Inflow @21%	PV Outlow @21%	PV Inflow @22%	PV Outlow @22%	PV Inflow @23%	PV Outlow @23%	PV Inflow @24%	PV Outlow @24%	PV Inflow @25%	PV Outlow @25%	PV Inflow @26%	PV Outlow @26%	PV Inflow @27%	PV Outlow @27%	PV Inflow @28%	PV Outlow @28%	PV Inflow @29%	PV Outlow @29%	PV Inflow @30%	PV Outlow @30%	PV Inflow @31%	PV Outlow @31%	PV Inflow @32%	PV Outlow @32%	PV Inflow @33%	PV Outlow @33%	PV Inflow @34%	PV Outlow @34%	PV Inflow @35%	PV Outlow @35%	PV Inflow @36%	PV Outlow @36%	PV Inflow @37%	PV Outlow @37%	PV Inflow @38%	PV Outlow @38%	PV Inflow @39%	PV Outlow @39%	PV Inflow @40%	PV Outlow @40%	PV @ 85.742574% Of Inflow	PV @ 85.742574% Of Outlow
			1043301.52	12119536.87	853946.22	10387048.02	732158.07	8991587.84	653490.65	7857930.58	602462.35	6929103.81	569225.57	6161689.42	547489.33	5522391.08	533217.65	4985513.66	523810.49	4531102.78	517586.01	4143564.21	513451.91	3810634.22	510696.04	3522607.46	508852.25	3271755.11	507614.28	3051883.95	506780.17	2858000.61	506216.23	2686054.52	505833.66	2532740.06	505573.27	2395343.59	505395.46	2271624.44	505273.65	2159721.91	505189.94	2058082.23	505132.23	1965400.88	505092.33	1880576.85	505064.66	1802676.07	505045.41	1730902.21	505031.98	1664573.12	505022.58	1603101.70	505015.99	1545980.44	505011.36	1492768.77	505008.08	1443082.59	505005.77	1396585.75	505004.13	1352982.96	505002.96	1312013.85	505002.13	1273448.03	505001.54	1237081.00	505001.11	1202730.64	505000.80	1170234.25	505000.58	1139446.10	505000.43	1110235.23	505000.31	1082483.70	505000.00	505000.00
			NPV =	-11076235.36	NPV =	-9533101.80	NPV =	-8259429.77	NPV =	-7204439.92	NPV =	-6326641.45	NPV =	-5592463.85	NPV =	-4974901.75	NPV =	-4452296.02	NPV =	-4007292.29	NPV =	-3625978.21	NPV =	-3297182.30	NPV =	-3011911.42	NPV =	-2762902.86	NPV =	-2544269.67	NPV =	-2351220.44	NPV =	-2179838.29	NPV =	-2026906.40	NPV =	-1889770.33	NPV =	-1766228.99	NPV =	-1654448.26	NPV =	-1552892.29	NPV =	-1460268.65	NPV =	-1375484.52	NPV =	-1297611.41	NPV =	-1225856.81	NPV =	-1159541.14	NPV =	-1098079.11	NPV =	-1040964.45	NPV =	-987757.41	NPV =	-938074.50	NPV =	-891579.98	NPV =	-847978.83	NPV =	-807010.88	NPV =	-768445.89	NPV =	-732079.46	NPV =	-697729.53	NPV =	-665233.45	NPV =	-634445.51	NPV =	-605234.80	NPV =	-577483.39	NPV =	0.00

a) So, IRR is 85.742574%

b) At Kc= 10%, NPV is negative i.e ($ 3,625,978.20), so project is not viable

However , If final Payment in year 44 will be $1,020,000

Even then NPV would be negative i.e. ($ 3,623,171.25)

c)Now IRR is = same as before i.e 85.742574 %

d) No, the project is not attractive at all and should not bee selected

FULL EXCEL MODEL COULD NOT BE UPLOADED AS MAXIMUM CHARACTERS ALLOWED IS 65000 CHARACTERS